Taiwan Financial Industry- Challenges and Opportunities December 2006 Sophia Cheng >> Research Analyst Merrill Lynch (Taiwan) +886 2 2376 3732 [email protected]No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons. Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on pages 32. Global Securities Research & Economics Group Global Fundamental Equity Research Department >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
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Taiwan Financial Industry- Challenges and Opportunities
December 2006 Sophia Cheng >> Research Analyst Merrill Lynch (Taiwan) +886 2 2376 3732 [email protected]. Taiwan Financial Industry- Challenges and Opportunities. No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons. - PowerPoint PPT Presentation
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Taiwan Financial Industry- Challenges and Opportunities December 2006
No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on pages 32. Global Securities Research & Economics Group Global Fundamental Equity Research Department>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
2Refer to important disclosures on pages 32
Taiwanese banks: low valuation in the region
Source: Merrill Lynch estimates
1. Still recovering from consumer debt problem
2. Gradual profit improvement in 2007
3. Need to find next areas of growth
• Follow your clients
• Management clients’ wealth
Dah SingBk of EAUOB SBI
NAB
DBS
CBA
Hang Seng Bk
ANZ
Chinatrust
SinoPacTaishin
Yuanta
Cathay
Fubon Kooknim
Wex bac
Woori
ESUNShinKong
CL
Bk of China
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
07E RoE (%)
07 P/B (x )How to improve?
3Refer to important disclosures on pages 32
GDP growth: Taiwan lags other emerging Asian markets
Note: OBU contribution in 2005 increased was mainly because of more provisioning in 2005. if taking out the extra provisioning, the contribution from OBU was < 20%
0
5,000
10,000
15,000
20,000
25,000
30,000
1998 1999 2000 2001 2002 2003 2004 2005
NT$mn
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
OBU pretax profit % to banks prtax earnings
15Refer to important disclosures on pages 32
Taiwan corporate investing the most to China (HK + China already 41%)
TW-China supervision MoU not signed
Taiwan export amounts
0
20
40
60
80
100
120
140
160
180
200
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
US$bn
USA Japan HK China Korea Europe Other
16Refer to important disclosures on pages 32
Taiwan is the biggest FDI in Vietnam
0
50
100
150
200
250
300
350
400
450
2002 2003 2004 2005 8M2006
US$mn
Taiwan direct investment in Vietnam
13% of Vietnam foreign direct investment comes from Taiwan in 2002-Aug06
17Refer to important disclosures on pages 32 1
Taiwan financial institutions landscape
____________________Non-classified financial institutions (e.g. China Development, Waterland FHC) not includedFigures in blue represent market cap in NT$ bn. Figures in green represent price-to- 1H06 book value ratios. Figures in grey represent FHC market cap in NT$ bn and FHC price-to-1H06 book ratio. Figures in red represent reported NPLs (%)Source: BOMA, Bloomberg, CBC, Taiwan Stock Exchange, SITCA. Assets and NPL ratios as of Sep 2003 and Dec 2003, respectively. Market cap data as of March 26, 2004(1) As of January 2004(2) Year 2005
0
500
1,000
1,500
2,000
2,500
3,000
Total AssetsNT$ bn
Life Insurance
Market Share of AUM
Banks
0%
2%
4%
6%
8%
10%
% of TotalTrading Volume
Securities
Increasing consolidation expected; led by Yuanta and Fubon
$751.2x
$1111.2x $22
1.1x$250.8x
$441.1x
$244.5x $16
1.0x
$911.3x
$2161.4x
$170.9x
0%
2%
4%
6%
8%
Asset Managers
Foreign competition increasingCurrently overpricedNo single company big enough to deliver transforming transaction
Mid-sized private banks likely to lead to consolidation
Government-related Banks New Private Banks FHCOld Private Banks
Larger banks are largely government controlled
$441.1x
Reported NPLs (%)
$2581.4x
1.5x$26
1.6x$141
$961.2x
$1982x
$1271.4x
$651.6x
$2161.4x
$270.9x
1.0x$21 $24
1.2x$100.9x 5x
$9
$911.3x
0.2x$3
0.6x$6
Life Insurance dominated by Cathay Group
Remaining life insurers are small and some are capital constrained
AIG-owned
$2701.9x $12
1.5x
$622.2x
$4613.4x
$241.6x
$2701.9x
Remaining P&C insurers are small and some are capital constrained
1 Land Bank 14.9% 13.4% 11.4% 10.9%2 Chinatrust 3.9% 6.2% 7.4% 7.8%3 TCB Bank 11.1% 9.5% 7.0% 6.7%4 Cathay United Bank 3.4% 3.0% 5.6% 6.1%5 Taipei Fubon Bank 4.5% 3.9% 2.9% 4.8%6 First Bank 4.6% 4.7% 5.0% 4.6%7 HNCB 4.1% 5.4% 5.1% 4.7%8 Taishin Bank 2.4% 4.1% 4.7% 4.6%9 Bank Of Taiwan 5.5% 4.9% 4.1% 4.3%
10 Bank SinoPac 2.5% 3.3% 3.6% 4.1%
19Refer to important disclosures on pages 32
Taiwan vs Korea: top 5 market share
Source: Merrill Lynch estimates
Assets Loans
KB 16% 21%
SFG 13% 15%
WFG 11% 14%
Hana 10% 9%
KEB 6% 6%
Top 5 marekt share 56% 65%
South KoreaTaiwan Loans AssetsLand Bank 8% 6.2%Bank Of Taiwan 8% 8.9%Taiwan Cooperative Bank 8% 6.9%Hua Nan Bank 6% 5.8%Chang Hwa Bank 5% 4.6%Top 5 market share 34% 32%
Valuation more reasonable: from ~2x book to ~1.4x book
Foreign interests in Taiwan
MoF initial plan and rules
1) Reduce market share of government-controlled bank (in terms of assets) from 50% to 25%-30%
2) Open up to foreign financial groups
21Refer to important disclosures on pages 32
Government initiativesProduct competitiveness: - how to compete with HK and Singapore
Encourage industry consolidation - why not copy a DBS model in Taiwan - friendly takeover vs. hostile takeover - transparency requirement - who should have independent boards - how to make privatization process better
Incentive for money and talents to stay - tax reform - incentive and compensation program - friendly environment
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